The bullish sentiment in the U.S. stock market has spread to the options market, with a key indicator dropping to a nearly four-year low, closely resembling the levels seen before the 2022 bear market, prompting market participants to issue a cautious warning.
According to Dow Jones Market Data, the Cboe Equity Put/Call Ratio's five-day moving average fell to 0.452 last Friday, the lowest since March 30, 2022, indicating that investors' demand for call options exceeded put options by over twofold.
Mark Arbeter, President of Arbeter Investments, stated in an interview with MarketWatch that this reading is "historically very low," and while not a direct sell signal at the moment, it is enough to make investors cautious. He believes this reflects an overly exuberant sentiment among retail investors driven by the artificial intelligence frenzy.
The last time this indicator reached a similar level was during the early stages of the 2022 bear market rally; an earlier occurrence was around the market peak in late 2021. In both historical precedents, the stock market experienced sustained declines.
Meanwhile, Mandy Xu, Head of the Cboe Derivatives Market Intelligence Department, pointed out that while the overall market volatility index VIX continues to decline, individual stock implied volatilities have surged significantly, widening spreads to historic levels, revealing a high degree of internal market differentiation.
However, despite the warning signals, the bullish momentum remains strong. On Monday, the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite Index all hit new record closing highs. According to Dow Jones Market Data, the S&P 500 has closed at a new all-time high 23 times so far this year.
Put/Call Ratio Drops to Four-Year Low
The Cboe Equity Put/Call Ratio's five-day moving average closed at 0.452 last Friday, the lowest since March 30, 2022. Mark Arbeter noted that this value indicates that investors' demand for call options is over two times that of put options, placing it in an extremely low range in a historical context.
The 21-day moving average of this indicator also moved downward, dropping to 0.493 last Friday, hitting a new low since December 9, 2021 (which was 0.490 at the time). Mark Arbeter stated that as long as this moving average remains in a "downward trend," the stock market may still have room to continue its uptrend, but the trend itself is evidence of an overheated market.
Of note, a put option can serve both as a directional bet on a stock market decline and as part of a hedge. When investors heavily buy call options and the hedging demand plummets, it often signals that market risk appetite has reached an extreme level.
Historical Precedents Point to the Eve of a Bear Market in 2022
Mark Arbeter combed through history and found that the last time the five-day moving average touched a similar level was during the first "counter-trend rally" of the 2022 bear market; tracing back further, a similar reading was seen during the market top phase at the end of 2021.
"When the market was entering the top area of the 2022 bear market, we also saw such a level," he said.
After these two historical points, the U.S. stock market entered sustained downtrends, providing a reference basis for the warning signal conveyed by the current indicator. Mark Arbeter also emphasized that the current situation does not constitute a clear sell trigger, but historical experience is enough to urge investors to exercise restraint when chasing gains.
Deepening Market Internal Divergence, AI Concepts Leading Gains
In contrast to the overall market's calm appearance, significant internal divergence is occurring in the stock market. In a report released on Monday, Mandy Xu pointed out that single-stock volatility measured by the VIXEQ index last week reached nearly a year-high, with the price spread between VIX and VIXEQ widening to a historic record.
This is the latest signal of the extreme level of market internal divergence in the past two months—stocks related to artificial intelligence have dominated most of the S&P 500 index's gains.
On Monday, the S&P 500 Information Technology sector surged by about 2.5%, becoming the core support for the index to hit a new all-time high again. According to FactSet data, of all 11 sectors in the index, only the Technology and Energy sectors saw gains that day, while the majority of other sectors declined.
The rise in the Energy sector is related to geopolitical disruptions. Reports indicated that Iran has stopped peace talks with the United States and is seeking a full blockade of the Strait of Hormuz—the key waterway for oil and gas exports in the Middle East—pushing international oil prices higher.
However, U.S. President Trump responded on social media Monday afternoon, stating, "Negotiations with the Islamic Republic of Iran are still rapidly advancing."
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